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Friday, November 5, 2010

Fed's Quantitative Easing Draws International Criticism

How was the international reaction to the Fed's massive quantitative easing plan? Decidedly not good.

The Fed's program, in which it will buy up to $600 billion in new U.S. debt (as a part of a $900 billion plan, as HuffPost's Shahien Nasiripour reported), has been criticized by foreign leaders as potentially damaging to the world economy. "With all due respect, U.S. policy is clueless," Germany's finance minister, Wolfgang Schaeuble, said Friday, according to Reuters.

Although he didn't go into much detail, Schaeuble said the issues that the Fed's policy attempts to address are not the country's fundamental problems. Quantitative easing is designed to lower interest rates: It makes the yield on Treasury bonds go down, and then lower rates spread, in theory, to the rest of the economy. In Schaeuble's words, it promotes liquidity, or the ease with which money moves around. It also promotes inflation, which, like low interest rates, theoretically encourages people to spend money now.

"With short-term interest rates already about as low as they can go, the FOMC agreed to deliver that support by purchasing additional longer-term securities," Fed Chairman Ben Bernanke wrote in a recent op-ed.

The blog Zero Hedge provides a helpful metaphor for understanding what, in its opinion, the Fed is doing: "Our Government Is Like a Plumber Trying to Fill the Bathtub by Pouring in More and More Water ... Without Plugging the Drain."

Europe's central bank issued an implicit criticism of Bernanke's policy when ECB head Jean-Claude Trichet decided he would not follow suit. And although French finance minister Christine Lagarde didn't complain outright, she doesn't seem happy with the Fed's move.